The Growth of Armenia's External Debt is Accelerating

Armenia keeps balancing its budgets only thanks to credits and financial aid provided by the foreign institutions and countries. The World Bank and donor countries cover the budget deficit. Foreign and local experts predict this trend will continue in the foreseeable future and Armenia's external debt will rise with the same logic.

According to statistics released by the National Statistics Agency, Armenia's foreign debt totals $865 million. Armenia's internal debt is less than 10 percent of that amount, almost $60 million. However, the government's ability to sell treasury bills in the local markets is limited, because there are not enough buyers in the local markets and, most importantly, the government cannot pay high yields on the government bonds, and the principal amount. Thus the only source to borrow money is the foreign financial institutions and donor countries.

The countries and institutions who lend the money to the Armenian government often attach strict conditions to the loans, because foreign institutions want to know whether the money is being spent on economic projects or if it is stolen. Some populist politicians and parties often describe those conditions attached to foreign credits and loans as a foreign plot to destroy Armenia. But no one in Armenia questions the fact that the money often ends up in the pockets of corrupt bureaucrats. The Armenian government now has a new anti-corruption program, but it is unclear how a corrupt bureaucrat can fight corruption.

The foreign debt is growing and it is not clear if Armenia will ever be able to repay it. Some CIS states want to declare themselves insolvent and ask donor countries to forgive their debts. There is no indication that Armenia intends to do so. But experts see worrying signs in Armenia's rising debt. The agreements that Armenia has with various donors suggest that until 2004 Armenia's external debt will rise by $250-300 million dollars a year.

World Bank experts have two alternative long-term predictions for Armenia's external debt. According to the more optimistic outcome, the country's external debt will reach $1.2 billion in 2010. According to World Bank experts, Armenia's state budget could handle this amount if the current growth rate accelerates and the investment level and exports increase. The experts predict that in this case only 8 percent of the budget would have to be spent on servicing the debt.

The second outcome is rather gloomy for Armenia. According to the World Bank experts, if the economic growth rate remains the same (5-6 percent) and export growth is slow, then almost 25 percent of the budget will have to be spent servicing the debt. This scenario will increase the possibility that Armenia will be constrained to ask donors to consider forgiving, or writing off Armenia's debt. However, the Armenian government should think hard before asking donors to forgive its debt, because that would hurt Armenia's creditworthiness in the global market, which in turn could hamper the chances of major economic recovery.